Appointment of Administrators No Guarantee for Company Directors
A recent Queensland Supreme Court decision is a timely reminder that company directors need to act promptly and seek proper advice when their company is, or soon will be, insolvent. If they fail to take proper action, directors could be held personally liable for the company's debts.
Despite the moratorium preventing the enforcement of guarantee claims prescribed by the Corporations Act 2001, the decision in Bank of Western Australia Limited v Clift demonstrates that there is a risk that in some circumstances, creditors are still able to immediately enforce guarantees of liabilities of the company given by the director or a spouse, de facto or relative of the director.
The Corporations Act 2001 encourages directors of companies that are facing financial difficulties to avoid the risk of insolvent trading liability by initiating a voluntary administration or members' voluntary winding up. There are a number of factors that directors need to consider before placing the company into voluntary administration.
Section 440J of the Act provides that during a company administration, a guarantee of a liability of the company cannot be enforced (except with leave of the Court) against a director, a spouse, a de facto spouse, or relative of the director. This section further provides that a proceeding in relation to a guarantee cannot be started against those people without the Court's leave. Importantly, this section does not prevent the enforcement of guarantees when the company goes into liquidation or executes a Deed of Company Arrangement, because the company is no longer under administration once the process has progressed to that stage.
It is important to note that the protection afforded by section 440J has always been of limited duration, and only exists for the relatively short lifespan of the voluntary administration itself.
Generally, the Courts have held that the rationale behind the moratorium is to encourage directors of insolvent companies to initiate an administration and to continue to co-operate with the administrator in carrying on the business of the company.
Timing is a very important issue for directors. Previous cases have confirmed that if a judgment has already been obtained against the director, it can be enforced even while the company is in administration. This is said to be because the creditor is enforcing the judgment, and not the guarantee. While this may seem to be an arbitrary distinction, the decision in Bank of Western Australia Limited v Clift demonstrates that the protection afforded to directors, spouses and relatives by the moratorium may have been even further eroded.
In Bank of Western Australia Limited v Clift, Justice Margaret Wilson considered an application for summary judgment brought by Bankwest against a director of a company in administration. Bankwest had lent money to two companies, TDC Acquisition Pty Ltd and Medico Australia Pty Ltd. The defendant in the case was the sole director of each company, and had guaranteed both companies' liabilities.
Administrators were appointed to Medico and that company went into liquidation. At the time, TDC was not under any form of insolvency administration. Bankwest subsequently demanded that the defendant pay the loans due by TDC and Medico, and commenced Court proceedings. After those proceedings were filed, administrators were appointed to TDC. At the time of the summary judgment hearing, TDC was still in administration.
Her Honour considered whether leave for Bankwest to proceed to obtain judgment was required under section 440J. Her Honour concluded that leave was not required, and granted judgment in favour of the plaintiff.
In concluding that leave was not required in this case, and granting judgment in favour of the plaintiff, Her Honour held as follows:
It appears that, while nominally legally represented, Mr Clift was not actually represented by a legal practitioner at the hearing, and his defence seems to have been poorly argued. Her Honour may have been able to reach the same outcome by granting the plaintiff leave to proceed, rather than drawing a fine distinction between continuing and commencing proceedings. Even so, Her Honour's comments about the continuation of proceedings against guarantors may have wide-reaching ramifications.
For more information about this case, please contact HopgoodGanim's Insolvency and restructuring practice.